Monthly Letter May 2012

In our monthly letters we like to discuss topics in the financial world that we find interesting and worthwhile commenting. These are not usual times though and in this monthly letter we would like to take the opportunity to go through how we view the world and what that means in terms of investment implications. As the scope of this letter is rather limited we will summarize our views in as short space as possible.

Madrague, like most investors, believe that the debt burden in the developed world is too high. There is a need to de-lever. Very few have the opposite belief. Next step creates a more heated debate though. How do we get the debt level down? We would argue that there are 4 main routes to achieve that.

–  The first is to grow your way out of it. This might seem like an easy way out, but the problem is to get the growth going. For individuals to consume more and increase spending they need to have confidence in the future. If you don’t believe that the social contract (i.e. pensions etc.) will be upheld then the community as a whole will not increase spending.
–  The second is to save and pay back debt. This is a painful and hard route that reduces spending and growth.
–  The third is to reduce the value of money and inflate the debt away. This option is less painful in the short run but will have long lasting repercussions.
–  The fourth is to default on the debt. Write it down and start all over again. For a small country it is a viable option, but to see the developed world default would have disastrous consequences.

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